Slamming China with tariffs is a mistake, and the US can do one big thing to support key industries, Yale economist says

• The US is taking an unnecessarily tough stance on China, Stephen Roach said.
• The Yale professor told the Odd Lots podcast that reducing the deficit is a better way to improve the US economy.
• Roach criticized the "vilified" rhetoric around China.

The US needs to readjust its approach to China or risk deep and unnecessary fallout between the world's two biggest economies, Yale economist Stephen Roach said.

The former Morgan Stanley China chairman blasted each country's mounting antagonism on Bloomberg's Odd Lots podcast, sharing dim views on rising trade barriers.

While President Donald Trump was the first to initiate higher tariffs against Beijing in his first term, restrictions have continued to expand under Joe Biden.

It's a similar setup to the 1980's face-off between the US and Japan, Roach said. As a manufacturing slump roiled US industry in that decade, Washington incorrectly put the blame on its trade deficit with Japan, he said.

"I think the end game was quite tough for Japan. Japan went from a growth miracle to a growth bust, went through arguably three lost decades of near economic stagnation, a considerable amount of which was an outgrowth of the currency policy that we and other developed nations imposed on Japan," he said.

The same seems to be happening with modern-day China. Throughout the current election cycle, Trump has pushed for much higher tariffs on imports from the country, arguing that this will help boost US production and protect industries.

Similarly, Biden has applied new restrictions on advanced technologies coming from China, such as electric vehicles and batteries. He's said the reasoning is to allow US domestic industries to mature.

However, there's a better approach to growing domestically than slapping tariffs on competitors, Roach says.

Both Trump and Biden should focus on reducing the country's budget deficit.

That way, the economy has the proceeds to invest domestically, whether for research and development, domestic infrastructure, or human capital.

"So there's a lot that we can do, but politically it's not attractive and not palatable to short-term focused American politicians," Roach said. Trump and Biden have each worsened the federal debt trajectory more than all previous presidents combined, he noted.

As was the case with Japan, blaming trade deficits for internal issues is a misunderstanding of international economics, Roach said — no one country is at fault. And even when trade is reduced, its manufacturing capacity simply is picked up by other economies that trade with the US.

Roach also dismissed talking points that trade restrictions serve as a national security barrier against supposed Chinese malintent.

"Our politicians are eager and aggressive to warn of consequences based on the presumption of intent that they have not been able and are unwilling to validate," he said. "And I know that's an unpopular view to hold in this bipartisan era of what I've called Sinophobia, but I've never seen in my adult lifetime an adversary that's been so vilified as we are now vilifying the Chinese."